Jim Manzi’s Sensitive Dependence on Initial Observations

Jim Manzi says that unlike physics, social science can’t make any useful, non-obvious predications. Which is funny because I can tell you straight away what will happen to equity markets in response to major policy announcements like changes in interest rate targets and the failure of TARP to pass its first vote.

Something, that didn’t appear obvious to the Congressmen who suddenly reversed course after the biggest single day loss in Dow history. In all honesty I wasn’t sure right up until the close whether we would break the single day record, for the simple fact that I didn’t know how long they would keep the books open. The vote happened pretty late in the day. I could tell you, however, that the total drop in demand was going to be record breaking.

On the other hand, all those hard science physicists can’t tell me what’s going to happen when I let go of the handle of this little toy.

That’s because the first problem does not display Sensitive Dependence on Initial Conditions but the second one does. When economists get to build the markets from scratch like an engineer building an airplane they can give you a pretty solid sense of how its going to respond to external stimuli.

We see this in some of the complex financial exchanges that economists have built. We see this in things like the medical match market that Al Roth built.

However, when you get stuck out in the real world things get considerably messier. Build a rocket ship to the moon, sure. The liftoff engine is really big, kinda like a 2% hike in the Fed funds rate. And, once you get high enough you’re in a frictionless environment, kinda like a perfectly functioning exchange.

But, I am still waiting for the physicist who can tell me for sure whether or not its going to rain tomorrow. And, they have satellites that can see the rain clouds coming!

That’s because weather, like micro level human behavior is chaotic. That doesn’t mean we can’t make any predications but it does mean that making predictions is hard.

I find it particularly odd that Manzi agrees with this statement by Sullivan

We can try to understand previous examples; we can examine large randomized trials; but in the end, we have to make a judgment about the timeliness and effectiveness of certain changes. It is the ability to sense when such a moment is ripe that we used to call statesmanship. It is that quality that no wonkery can ever replace.

It is why we elect people and not algorithms.

Since one of, if not the greatest, contributions of economics to humanity is the highly non-obvious insight that no amount of human level judgment can hope to replicate market mechanisms.

Its important to remember that this is not the claim of Jeffersonian Liberals. They were concerned that a ruler would use unfettered power to oppress his subjects. It was social scientists who told us that even the benevolent king, even Aristotle’s philosopher-king, could not handle the information problem that free markets solve.

1 comment

Enough with this human-chauvinistic discrimination against algorithms. Is there any evidence they do worse than human beings at making decisions? “Supercrunchers” presents a number of studies suggesting just the opposite.